Is China’s Future Hazy?

Andrew Bateson and Jason Dean have a provocative article in the Wall Street Journal today (Monday, August 25) that highlights the challenges facing China as it seeks to sustain growth. The three major challenges that they identify are the aging population, increasing inequality and constrained supplies of energy and natural resources. These are not surprising issues to focus on, though I have some comments on the specifics of the authors’ arguments.

What struck me first, though, was the following statement:

“The precedents aren’t encouraging. Many developing countries in Latin America and the Middle East stagnated after periods of rapid growth. Economists sometimes call this the ‘middle-income trap’ because so many countries have failed to achieve consistent growth that would deliver higher prosperity.”

I wasn’t aware of this ‘trap’ as something economists had postulated. I know that many countries in Latin America and the Middle East have stagnated or even gotten poorer, after growing rapidly. But I associated that problem with bad domestic policies (especially with respect to trade and macroeconomic management) and dysfunctional political economies (the latter often the cause of the former), which can create problems at any income level. The idea that it would be hard to be in the middle seemed somewhat surprising to me.

Looking around, I found the following from a 2007 news story on a World Bank report on East Asia ten years after the crisis. Here is the excerpt:

“The region has grappled with and overcome the crisis to return to solid growth,” says the report’s principal author and lead economist for the World Bank’s East Asia and Pacific region, Milan Brahmbhatt. “The past 10 years have seen the emergence of China as a major global economic power, a doubling in the value of regional output levels, a halving in poverty rates, a jump in global and regional integration and accumulation of over $2 trillion in foreign reserves.”

But the report warns new challenges are arising which could slow or even derail growth if not handled properly. “The idea of a ‘middle income trap,'” says Brahmbhatt “is that the strategies that allow countries to grow from low income to middle income are not enough to get them to high income. Historically, few countries have mastered the complex technical, social and political challenges that arise.”

By 2010, more than nine in 10 East Asians will be living in a middle income economy. To move out of the middle-income trap, a key challenge is maintaining high growth in a sustainable way. In China, this means new strategies to tackle severe environmental problems and other stresses and imbalances that have emerged during the last 20 years of very rapid growth.

So this World Bank view sounds a lot like the premise that the WSJ article is using. I must confess that I still didn’t see a clear analytical argument about why being middle-income creates problems for growth. So I looked some more, and found a blog post, which discusses an analytical paper on the middle-income trap. Here is an excerpt:

“In a recent NBER Working Paper, Jan Eeckhout and Boyan Jovanovic raise the possibility of the latter trap. They explain how the integration of the world’s labour markets creates big gains for rich and poor countries alike (blueprints flow from California to China, while manufacturing goods flow in the opposite direction), leaving middle-income countries in limbo: they are not technology-savvy enough to compete with rich countries and are not cheap enough to compete with China.”

Oops, China is middle-income, at least at the lower end of that category. Or maybe not. The blog post has some interesting stuff about Portugal and how it may be getting out of the middle-income trap. But Portugal’s 2007 PPP GNI per capita was US $20,640. That was only two-thirds of Spain’s, but Argentina’s was $12,990, Brazil’s was $9,370, and China’s only $5,370. Seems to me that this is all a bit muddled, and that China has quite a way to grow. It certainly has to worry about inequality and social unrest, about destroying its environment and making its people sick with pollution, and its demographics. But I don’t think any of this is really anything to do with a ‘middle-income trap.’

There is lots that can go wrong with China, but looking at how they executed on the Olympics (never would have happened so successfully in the two middle-income Latin American countries listed above), at their high-end firms, their burgeoning higher-education sector (as well as increasing numbers studying abroad), and the general strategic approach of the leadership, I wouldn’t be surprised if they do master the “complex technical, social and political challenges that arise.” Even though it’s much bigger, it seems to me that China can reach South Korea’s level of income (2007 PPP GNI per capita of US $24,750) without falling into any trap. After all, I don’t think they are doing exactly the same things they were ten years ago, so it’s not as if their strategies have been constant.

Back to the challenges highlighted in the article. A couple of statements stuck out. First, this one:

China’s per capita energy consumption has been growing, and it is profligate relative to its per capita income, but it is still only about a seventh of the US, and maybe a quarter of other rich countries. So at maybe double the population of the rich nations, and one fifth the energy consumption per capita, that works out to China’s energy consumption being less than half of the rich world’s. So who’s depleting more resources, China or the West?

Here is another quote from the WSJ:

“China has become one of the world’s most unequal societies, based on measures of the gap between richest and poorest.”

Here are some numbers from the UN’s Human Development Report, 2007-08:

There are a lot of countries less unequal than China, but also 33 countries with higher Gini indices.

So, when I really studied this article, I found there was much less to it than initially met the eye. Too bad. China really deserves some good analysis, of its problems as well as its potential. Any pointers from readers welcome.

And let me end by urging once more that the BRIC grouping be discarded.

One Response to "Is China’s Future Hazy?"

JBOSS September 6, 2008 at 11:07 pm

While I don’t agree there is a specific “trap” in development, the different strategies for different stages are well known and researched (see “Global Competitiveness Report”).A trap seems to arise, if there is a clearly divided society that encourages good education for the traditional elites and forgets the rest of the population. The non-elite workforce will simply not gain the necessary skills to participate in advanced sectors, the elite will not grow in numbers.This is particular shameful in South America, seems to exist in Arabian countries and was successfully overcome in Taiwan and Korea.In a way “Communism” should be perfect to reshuffle this traditional elite/ non-elite divide, so China will probably make it.When it comes to India I’m not sure.There are more Classes in India. The optimal strategy might be to try to include them into the middle class one by one.